Bankers weigh in on housing decline

A group of Lehigh Valley bankers says the current housing slowdown won't go away overnight and will affect builders, residents with less-than-stellar credit and businesses considering an expansion.

The region will be spared some of the toughest aspects of the economic slowdown because there was less speculative building here and home price appreciation was more moderate, said the panel of three local bankers who gathered at The Morning Call on Monday for a round-table discussion on the impact of the credit crunch in the Lehigh Valley.

Free-flowing credit that allowed people to buy homes with little or no money down during the boom years earlier this decade has tightened. That means some people may not be able to buy a home, and homeowners won't be able to refinance as easily. Wachovia Corp., for example, announced last week that it has changed its underwriting policies to limit the number of risky home loans it carries.

Companies will feel the crunch as consumer spending slows down.

''We've seen businesses question their own decisions to expand and grow,'' said David Lobach, chief executive officer of Embassy Bank, in Hanover Township, Northampton County, who participated in the panel. ''We've seen the business community take a step back.''

He added, ''It's going to take some time for us to work through this.''

Wachovia, the region's top bank for deposits, announced a surprise first-quarter loss Monday of $393 million. The company, which bought a California mortgage lender in 2006, said it will slash its dividend and raise $7 billion in a share sale as a result of the poor performance.

The bank, which has about 25 percent of local deposits, was unable to participate in the panel Monday. In an interview last week, Wachovia's top local official, Jan Heller, said lenders want more equity from residential and commercial borrowers in the current climate. She said there is less confidence in speculative commercial projects where buyers and tenants are not in place before construction begins.

Small community banks are less likely to see a large impact from the subprime lending crisis because they do not resell the mortgages. That means they tend to be more conservative in lending because they keep the loans on their balance sheets. But national banks have an edge over regional and local banks in the Valley, with about 44 percent of the deposits. Moreover, the Valley won't be completely immune from foreclosures or layoffs that stem from the national housing downturn.

James F. Deutsch, president of TeamCapital Bank in Bethlehem Township, said the lending crisis exploded in part because new types of mortgages, some of which required no down payment or no income verification, were offered to subprime borrowers, who had shaky credit.

Many borrowers chose mortgages that begin with lower so-called teaser rates and later reset to higher monthly payments. Foreclosures are on the rise already in the Valley, and economists predict more homeowners will default on mortgages this year as more adjustable-rate mortgages reset to higher, unaffordable rates.

Deutsch, who participated in the panel, said ''the lack of advice'' was part of the problem.

''Knowing your borrower is key,'' he said.

The market for homes in the Valley remains much stronger than in other parts of the country such as California and Florida where home prices in some cities have plummeted after a much steeper rise. Nonetheless, the housing market has slowed here, after home prices rose 10 percent or more each year from 2003 to 2006, according to the Lehigh Valley Association of Realtors.

An influx of more affluent buyers from New Jersey who helped fuel the boom, however, has also slowed.

''The New Jersey homeowners would still like to buy in the Lehigh Valley,'' said Bob Rupel, president of Lafayette Ambassador Bank, who participated in the panel. ''What's put that action on hold is they can't move until they sell what they have.''

Banks are not financing new subdivisions as much as they were during the boom, the panel said, and builders are constructing fewer homes on speculation. Permits for new homes in the Lehigh Valley fell 30 percent last year compared with 2006 according to the U.S. Census.

''We are certainly not encouraging them to do spec projects,'' said Rupel, who is chairman of the Pennsylvania Bankers Association.

All three bankers said the current climate will encourage a return to more conservative lending, in which people borrow what they can afford, and not more.

''There are a lot of basics to this,'' Lobach said. '''Can I afford it?' is a very important question.''